Managing involuntary closure for companies

Involuntary closure can take place in different ways, depending on the structure of the business closing down. For companies, the process can either be receivership or liquidation.

Receivership can be initiated by a secured creditor to recover their financial interest in a company’s assets, while liquidation takes place primarily to repay unsecured creditors who don’t hold any security in a company’s assets.

Both receivership and liquidation are often confused with voluntary administration. This is the process of appointing an administrator to turn around a failing company while at the same time preventing creditors from pursuing further actions – such as placing it in receivership or liquidation.

What is receivership?

Companies often gain finance by offering an asset as security over investment from a creditor. That creditor is then known as a secured creditor.

If the company fails to repay their debts, this secured creditor can appoint a receiver under the Receivership Act (1993) to manage the sale of the asset to repay the debt owed to them. Receivership is usually initiated as a condition of the original finance agreement, but secured creditors can also apply for court-ordered receiverships.

Receivership does not affect any assets that haven’t been used as security for the creditor.

The receivership process

After a company is put into receivership, the receiver releases a first report and then a subsequent report every six months to update shareholders, creditors and the Companies Office – the register for companies in New Zealand – on the progress of the receivership.

Receivers must also report any offences they believe have been committed to the register while they carry out their work.

Once the receivership has ended – and the secured creditors have been repaid – the receiver must notify the registrar in writing and deliver a final report.

The company’s status in the national register of companies then reverts back to “Registered”. The company can then start trading again.

If the sale of assets requires the company to close down, it then ceases operations permanently.

If unsecured creditors are still owed money, the company can then be put into liquidation.

However, a company doesn’t have to be placed into receivership first before it can be placed into liquidation. Likewise, a receiver can be appointed before or after a liquidator has been appointed.

What is liquidation?

When a company is failing to the extent that it can’t pay back its debts, it may be put into a process known as liquidation to ‘liquidate’ (i.e., sell) all its unsecured assets to create funds to repay its creditors.

A liquidator is put into place to control the company and manage the liquidation, and carry out investigations to establish why the company failed.

A company can be put into liquidation by:

Its shareholders (who hold a meeting known as a special resolution to pass a vote on it).

Its board of directors.

A court order (this is usually done by a creditor, but it can be the shareholders should they not agree to put the company into liquidation).

Its creditors (if they vote to pass a resolution at a watershed meeting during a voluntary administration).

Liquidators

Liquidators are typically sourced from the private sector when a company is put into liquidation by its shareholders, directors or creditors. They’re often chartered accountants with specialist expertise in managing insolvency.

However, when a company is placed into liquidation by a court order, the court places the liquidation under the charge of either a private liquiator or the court’s own Official Assignee who then acts as the liquidator.

The liquidation process

As the liquidator assesses the company’s assets and carries out investigations into why it failed, they have to provide regular reports to update the company’s creditors and shareholders on how the liquidation is proceeding.

Some liquidations also involve creditors’ meetings, which are a forum for creditors to raise their concerns and discuss any other relevant matters.

If you’re a director of a company put into liquidation, your powers remain limited throughout the process. Your main responsibility is to support and co-operate with the liquidator, and provide information about the company’s accounts and affairs when requested.

Failure to assist a liquidator (whether they’re privately appointed or the Official Assignee) is a serious offence and can lead to a complaint to the Registrar of companies.